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Chemicals Companies Need Security Of Demand

Business, China, Company Strategy, Economics, Europe, Naphtha & other feedstocks, Oil & Gas, Sustainability, US
By John Richardson on 23-May-2016


By John Richardson

MUCH of the focus of last week’s Asia Petrochemical Industry Conference (APIC) in Singapore  once again seemed to be about feedstock advantage.

This included several charts ranking the competitiveness of the three major categories of ethylene producers – naphtha-based, ethane-based and coal-based – in low, medium and high future oil price scenarios.

This has always mattered, of course, and will always matter. These charts were thus very useful. Convincing a board of directors to give the go-ahead for a project, especially if that board sits at the head of a listed company, will continue to depend on future margin projections, and thus rates of return on investments – both of which depend on access to advantaged-enough raw materials.

But for me there was not enough debate about all the complexities surrounding future demand growth now that the Economic Supercycle is over. There is no space here to go into all of the complexities in detail, and so this will be the subject of a series of future blog posts. Click here, though, for just one example.

It would have been great that instead of mainly analysing feedstock advantage, there had been more public discussions during APIC about the need to assess “demand advantage”, literally project by project.

Returning to the still crucially important task of assessing feedstock advantage, investors and other stakeholders in petrochemicals companies are very comfortable with posing questions about a particular project’s security of feedstock supply, and the terms of that supply. For instance, an investor will often ask: “How long is your naphtha-supply contract and what is it likely to cost over 20-30 years?”

I believe, though, that more investors and stakeholders will very soon also be asking questions such as this: “How long do your demand contracts last, and what sales volumes do these contracts guarantee over the next 20-30 years?”

The smart companies will be well ahead of the curve here. They will already have very convincing answers to demand-driven questions about the viability of projects, backed up by binding letters of intent from buyers that can be easily turned into legally enforceable purchasing contracts.

As I said, the smart companies will already be ahead of the curve here. And some companies may have always done this. They may have always guaranteed future sales through binding, rather than just vague, letters of intent from buyers.

And perhaps I spoke to the wrong people at APIC. Perhaps this means that most of the industry is already prepared for more searching questions on their security of demand 3ven if, in public, the details of how these questions would be answered seemed very sketchy.

I believe that this kind of approach is of particular importance to a company building a project in a developed market that will be largely based on exports to the developing world.  These types of companies will very likely be listed, and so will not benefit from government subsidies that often protect producers in the developing world.

How will these smart companies have gone about guaranteeing their own demand in this post-Supercycle world?

Their starting point will have been  by identifying some of the key challenges the world faces, which are outlined above by the World Economic Forum.  They will next have turned these challenges into growth “megatrends” – such as dealing with water and sanitation shortages and improving healthcare and infrastructure.

They will have also moved well beyond these beginnings to the stage where they will already have the products and services in their business portfolios to satisfy the megatrends.

Further, they will  recognise that their new products and services cannot stand still. They will have thus invested in the right quantity and quality of techno-commercial and sales and marketing people – on the ground in all the key markets – to keep their products and services up to date with rapidly evolving consumer needs.